This sovereign rating is issued by The
Economist Intelligence Unit credit rating agency, registered in accordance with
Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as
amended, and is issued pursuant to such regulation.

The rating remains at AA and the score at 16. Germany’s budget is in surplus, and fiscal discipline has full political and public support. The country enjoys safe-haven status during global market volatility, and demand for sovereign bonds is being boosted by the quantitative easing programme of the European Central Bank. The debt/GDP ratio is high for an AA-rated country, but has been falling fairly quickly since 2013—a trend that is expected to continue.

Currency risk

The rating remains at A, after a rating band change from BBB in April. A better economic and institutional outlook for the euro zone has increased its resilience to political risk and external shocks, and structural support for the currency comes from a large current-account surplus. The Economist Intelligence Unit expects the euro to average US$1.21:€1 in 2018-19 after US$1.13:€1 in 2017.

Banking sector risk

The rating remains at A and the score at 24. In aggregate, the banking sector is well capitalised and the level of non-performing loans is low. There are concerns about smaller, regional lenders, many of which are poorly capitalised, and worries remain about the outlook for Deutsche Bank, the country’s largest lender. Low profitability, high leverage and fragile balance sheets will remain causes for concern, but do not pose an immediate threat to the outlook.

Political risk

The September 2017 federal election led to a lengthy government formation period. The new government has greater internal policy disagreements than its predecessor, and a far-right party now has a voice in parliament. However, German politics will remain strongly centrist and consensus-driven, and so does not pose a threat to sovereign creditworthiness.

Economic structure risk

Dependence on exports, especially of capital and transport goods, exposes Germany to downturns in external demand. We expect the recent exchange of tariffs between the US and the EU to be broadened to include European cars later this year, but to stop short of a trade war. An escalation of the global trade conflict to the point where it harms economic growth remains a risk, however.